Buy-to-let landlords risk being left out of pocket as they fail to do simple checks before investing

Unprepared: Many would-be landlords do not consider the costs or the legalities and responsibilities of owning a buy-to-let property

Would-be landlords risk being left tens of thousands of pounds out of pocket because they are piling in to a buy-to-let boom without doing proper research.

Banks are issuing the largest number of landlord loans since records began. One in eight home loans — around 1.5million — are for rental properties, according to watchdog the Financial Services Authority.

Borrowers with big deposits are turning to buy-to-let to protect their nest eggs from plummeting savings rates.

Many are attracted by the promise of high returns, driven by demand from the growing number of families who struggle to get a mortgage of their own.

But experts say many of these would-be landlords are failing to complete even the simplest checks before making the plunge and they risk seeing the value of their investment fall.

Alan Ward, chairman of trade-body the Residential Landlords Association, says: ‘It is possible you can do well — but it’s vital to do your research first.

‘We are finding that many of the people coming in are not prepared for the costs or for the legalities and responsibilities of owning a buy-to-let property.

‘For example, what do you do if your tenant suddenly leaves and you must cover the mortgage on the property or you have to pay for emergency repairs? Do you have money set aside? These are questions that many people who are entering the market don’t seem even to have considered.’

Landlords who buy properties in areas where rents are soaring, such as the North-West, risk being left out of pocket if property prices keep falling.

Chris Norris, head of policy with the National Landlords Association, says: ‘The last thing you should do is buy in an area you have barely visited — even if rental yields are high there.

‘Instead you should go somewhere you know well, where you understand the market and have a better idea of what the demand for rental accommodation is likely to be in the future.

Know your area: Landlords who buy properties in areas where rents are soaring, such as the North-West, risk being left out of pocket if property prices keep falling

‘For example, if you know that your local university is going to build five new accommodation blocks, you might reconsider buying a property nearby to rent to students because of likely lower demand.’

Rising numbers of novice landlords are also being caught out by rogue letting agents.
These firms promise to put the tenant’s deposit into a Government-accredited scheme on behalf of the landlord, as the law demands. But instead, the letting agent disappears with the cash.

The best buy-to-let mortgages are offered only to landlords with bigger deposits and excellent credit. One of the cheapest deals is through Accord Mortgages. It has a two-year fixed rate at 3.99 per cent with a 30 per cent deposit and £195 fee.
Monthly interest-only payments are £499 on a £150,000 loan. Borrowers who take up this offer can also get £500 cashback.

Landlords have not escaped the tough new mortgage rules affecting ordinary buyers.
In the past, rent from a property was required to typically cover 125 per cent of the monthly payment. So, with a mortgage of £1,000 a month, a landlord would need £1,250 from their tenant.

Today, banks want to see rent covering up to 160 per cent.
Buy-to-let mortgages are generally interest only. Borrowers should also beware of sky-high fees with many mortgages which appear to have the lowest rates.

The Mortgage Works offers a two-year fix at 2.99 per cent for borrowers with a 40per cent deposit, with monthly payments of just £374 interest-only. However, the fee is 3.5 per cent of the loan amount.

So, on a £150,000 loan, a borrower would end up paying £5,250 — bringing the total cost to £14,226.

Coventry BS has a five-year fixed- rate deal at 4.35 per cent for borrowers with a 35 per cent deposit — making monthly interest-only payments of £544 on a £150,000 loan. However, there is a £2,050 fee, bringing the total cost to £34,690.